Planning for Life

The All-Too-Common Misuse of Nominee Realty Trusts, and the Consequences

Posted by Harry S. Margolis on October 12, 2021

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By Harry S. Margolis

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In a prior post we discussed the problem of missing schedules of beneficiaries on nominee realty trusts. Now we'll discuss their all-to-common misuse.

As we have explained in that post, nominee realty trusts are excellent vehicles for holding real estate among several owners and for keeping the true ownership private. While they're called "trusts," they're really more of an agency agreement. The trustees manage the property for and at the direction of the beneficiaries who are listed on a separate schedule which is not recorded at the registry of deeds.

Four Errors

A situation involving a nominee realty trust was recently brought to my attention that included several mistakes that are holding up the sale of the property in trust (which due to lack of funds continues to deteriorate). These errors include:

1. Beneficiaries named in the trust as well as the schedule of beneficiaries.

First, the beneficiaries are named in the trust itself. It says in part: "the Trustee shall have power to deal in or with the trust estate with the vote and consent of the beneficiaries, namely [beneficiary 1 and beneficiary 2]." (I'm removing the names to protect the innocent; after all, the clients are not at fault here.)

Normally, the beneficiaries are not named in the trust so that their names can be kept private and be changed without changing the terms of the trust. Here, it's not clear what happens if the beneficiaries changed since those named in the trust document may continue to have power in the trust.

2. Names inconsistent.

Second, the names listed in the trust are inconsistent with the beneficiaries listed on the schedule of beneficiaries, which includes in addition to beneficiaries 1 and 2, beneficiary 3. Did the grantors intend that only the first two beneficiaries would guide the trustees?

3. Schedule of beneficiaries recorded at registry of deeds.

Third, the attorney recorded the schedule of beneficiaries at the registry of deeds along with the trust. This creates a lot of title issues because of what the schedule actually says (see below) and they cannot be corrected simply by updating the schedule of beneficiaries.

4. The schedule of beneficiaries is unclear about rights.

Fourth, schedules of beneficiaries should simply state the identities of the beneficiaries and along with their respective percentage interests in the trust. The schedule of beneficiaries in this case does not state what interest each beneficiary has and instead describes their interesst and says what will happen when they die. It states that the three beneficiaries have the:

right to income, principal and occupy the premises . . . for their natural lives and upon their death the trust shall terminate; the trustee shall transfer and convey the entire trust property in equal shares to [remainderperson 1 and remainderperson 2], if living, otherwise to their issue with Right of Representation per Stirpes.

This is beginning to look a lot like a true trust, not a nominee realty trust, since it lays out the interests of the lifetime beneficiaries and of the remainder beneficiaries after they die. But a lot of this is unclear. What does it mean to have a "right to principal?" Can the beneficiaries demand all the principal of the trust? Now, only one of the three beneficiaries is alive, but who would get the principal when more than one was alive? If she has the right to withdraw the principal, what interest do the remainder beneficiaries have.

Given the lack of clarity, the title insurance company for the buyer of the property is requiring that the remainder beneficiaries sign the deed or that the surviving lifetime beneficiary obtain a court declaration of her rights. The remainder beneficiaries are refusing to cooperate, forcing the seller to go to court, all of which would have been necessary had the attorney not chosen to modify the standard nominee realty form and practice.

Trusts and Nominee Realty Trusts

While it's unusual for the drafter of a nominee realty trust to include beneficiary names in the trust, this is not the first time we've seen schedules of beneficiaries recorded along with the trust. It's even more common to see schedules of beneficiaries listing not only the interests of the current beneficiaries by also stating what will happen when they pass away. This has always troubled me for the reasons we see in this case.

Trustees of nominee realty trusts are supposed to act as directed by the beneficiaries. For instance, as in this case, they cannot sell the property in the trust without being directed to do so by the beneficiaries. When the schedule gives right to future as well as current beneficiaries, this raises serious questions as to who will direct the trustees. Not only may the remainder beneficiaries have to be included, but also possibly their children and grandchildren if, as in this case, the schedule of beneficiaries says that in order for them to receive their interest they must outlive the lifetime beneficiaries. We cannot know for sure who will outlive whom until all the primary beneficiaries pass away.

In short, if the grantors wanted to create a true trust setting out the various interests of lifetime and subsequent beneficiaries, that's what they should have done and not started with a nominee realty trust. Trying to fit the flexibility of a trust into a standard nominee realty trust form has created title problems.

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